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| CBIN > SEC Filings for CBIN > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Safe Harbor Statement for Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to our actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; competitive conditions in the banking markets served by our subsidiaries; the adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other factors disclosed periodically in our filings with the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by us or on our behalf. We assume no obligation to update any forward-looking statements.
Financial Condition
Total assets increased to $857.0 million at September 30, 2008 from $823.6 million as of December 31, 2007 primarily from an increase in interest bearing deposits in other financial institutions of $9.8 million and an increase in securities available for sale of $10.7 million. The increase was funded through a net inflow in total deposits of $24.5 million and an increase in Federal Home Loan Bank advances of $15.6 million. During the third quarter of 2008, the Company aggressively marketed and priced its interest bearing deposit products in an effort to increase liquidity. Total deposits increased to $597.8 million at September 30, 2008 from $573.3 million as of December 31, 2007 as interest-bearing deposits increased by $11.4 million and non-interest bearing deposits increased by $13.1 million. The growth in the Company's deposits was achieved through the marketing and pricing of certain interest bearing deposits previously mentioned, but also due to new customers seeking to diversify their deposits from other financial institutions.
Net loans increased by 0.9% to $635.1 million as of September 30, 2008 from $629.7 million at December 31, 2007. Most of the growth in the Company's loan portfolio was concentrated in commercial and commercial real estate loans which grew a combined $28.1 million from December 31, 2007, while the Company's construction loans secured by real estate decreased by $13.1 million. Management is seeking to reduce its exposure to construction real estate given the weak local market for developers and diversify into other commercial loan types.
Securities available for sale increased from December 31, 2007 by $10.7 million to $110.2 million as of September 30, 2008 primarily due to purchases of $55.4 million, offset by maturities, prepayments and calls of $20.7 million, sales of $19.1 million, and a decrease in the fair value of the portfolio of $5.4 million. The securities portfolio serves as a source of liquidity and earnings and plays an important part in the management of interest rate risk. The current strategy for the investment portfolio is to maintain an overall average repricing term between 3.0 and 3.5 years to limit exposure to rising interest rates. As discussed in Note 2 of the financial statements, the Company has experienced a significant decline in the fair value of the collateralized debt obligations ("CDO's) within its portfolio during 2008 of approximately $3.6 million.
FHLB advances increased to $106.9 million while other borrowings decreased to $69.9 million at September 30, 2008 from $91.4 million and $72.8 million at December 31, 2007, respectively. The proceeds from the increase in FHLB advances was utilized to offset the decrease in total deposits, fund loan growth, and purchase available for sale securities.
Net Income. Net income was $919,000 for the three months ended September 30, 2008 compared to $1.1 million for the same period in 2007. Basic and diluted earnings per share decreased to $0.28 per share for the third quarter of 2008 from $0.33 for basic and diluted earnings per share for 2007. The decrease in net income and basic and diluted earnings per share for the third quarter in 2008 was due to increases in the provision for loan losses and non-interest expenses, offset by increases in net interest income and non-interest income and a decrease in income tax expense. The annualized return on average assets and average shareholders' equity were 0.43% and 5.86% for the three months ended September 30, 2008, respectively, compared to 0.53% and 6.75% for the equivalent periods in 2007.
Net income decreased to $2.2 million for the nine months ended September 30, 2008 from $3.0 million for the same period in 2007. Basic and diluted earnings per share were $0.67 and $0.66 per share, respectively, for 2008 as compared to $0.90 and $0.89, respectively, for 2007. The decrease in net income for the nine month period was the result of a significant increase in the provision for loan losses, offset by an increase in non-interest income and a decrease in income tax expense. The annualized return on average assets and average shareholders' equity were 0.35% and 4.53% for the nine month period ended September 30, 2008, respectively, compared to 0.50% and 6.25% for 2007.
Net interest income. Net interest income for the three and nine months ended September 30, 2008 increased by $87,000 and decreased by $32,000 to $5.9 million and $17.6 million, respectively, from $5.9 million and $17.6 million for the equivalent periods in 2007. The Company's net interest margin on a taxable equivalent basis decreased to 3.09% and 3.12% for the three and nine months ended September 30, 2008, respectively, from 3.13% and 3.19%, respectively, for the same periods in 2007. The increase in net interest income for the three months ended September 30, 2008 as compared to same period on 2007 was due to an increase in average earning assets, primarily from loans, and a larger decrease in the cost of interest bearing liabilities as compared to the yield on interest earning assets. The net interest margin on a taxable equivalent basis for the third quarter of 2008 decreased as compared to 2007 as average interest bearing assets increased by $28.6 million. Net interest income and net interest margin on a taxable equivalent basis for the nine months ended September 30, 2008 both decreased primarily due to the reversal of previously recognized interest income on loans placed on non-accrual during the period, mostly in the first six months of 2008. Average earning assets increased by $18.1 million to $765.7 million for the nine months ended September 30, 2008 from $747.6 million for the equivalent period in 2007.
The cost of interest-bearing liabilities continues to be significantly affected by the $67.0 million in funding provided by FHLB advances, which principally consists of putable (or convertible) instruments that give the FHLB the option at the conversion date (and quarterly thereafter) to put an advance back to us, and are on average higher than current alternative costs of funds. If the FHLB puts an advance back to us, we can choose to prepay the advance without penalty or allow the interest rate on the advance to adjust to three-month LIBOR (London Interbank Offer Rate) at the conversion date (and adjusted quarterly thereafter). We estimate the three-month LIBOR would have to rise in excess of 300 basis points before the FHLB would exercise its option on the majority of the individual advances. We use FHLB advances for both short- and long-term funding. The balances reported at September 30, 2008 and December 31, 2007 are comprised of long-term and short-term advances.
Average Balance Sheets. The following tables set forth certain information relating to our average balance sheets and reflect the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are computed on daily average balances. For analytical purposes, net interest margin and net interest spread are adjusted to a taxable equivalent adjustment basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent ("FTE") basis. Loans held for sale and loans no longer accruing interest are included in total loans.
Three Months Ended September 30,
2008 2007
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(In thousands) (In thousands)
ASSETS
Earning assets:
Interest-bearing
deposits with banks $ 9,264 $ 40 1.72 % $ 2,400 $ 19 3.14 %
Taxable securities 101,916 1,268 4.95 96,499 1,166 4.79
Tax-exempt securities 18,390 305 6.60 11,620 208 7.09
Total loans and fees (1)
(2) 642,099 9,662 5.99 632,553 11,738 7.36
FHLB and Federal Reserve
stock 8,107 109 5.35 8,125 87 4.25
Total earning assets 779,776 11,384 5.81 751,197 13,218 6.98
Less: Allowance for loan
losses (6,931 ) (5,770 )
Non-earning assets:
Cash and due from banks 27,871 17,889
Bank premises and
equipment, net 15,157 15,492
Other assets 39,314 40,474
Total assets $ 855,187 $ 819,282
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 210,464 $ 703 1.33 % $ 223,326 $ 1,532 2.72 % Time deposits 281,448 2,697 3.81 263,130 3,226 4.86 Other borrowings 72,301 319 1.76 61,115 703 4.56 FHLB advances 107,228 1,403 5.21 102,674 1,499 5.79 Subordinated debentures 17,000 212 4.96 17,000 328 7.65 Total interest-bearing liabilities 688,441 5,334 3.08 667,245 7,288 4.33 Non-interest bearing liabilities: Non-interest demand deposits 101,041 82,013 Accrued interest payable and other liabilities 3,270 6,060 Stockholders' equity 62,435 63,964 Total liabilities and stockholders' equity $ 855,187 $ 819,282 Net interest income (taxable equivalent basis) $ 6,050 $ 5,930 Less: taxable equivalent adjustment (104 ) (71 ) Net interest income $ 5,946 $ 5,859 Net interest spread 2.73 % 2.65 % Net interest margin 3.09 3.13 |
(1) The amount of direct loan origination cost included in interest on loans was $105 for the three months ended September 30, 2008. The amount of fee income included in interest on loans was $58 for the three months ended September 30, 2007.
(2) Calculations include non-accruing loans in the average loan amounts outstanding.
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Nine Months Ended September 30,
2008 2007
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(In thousands) (In thousands)
ASSETS
Earning assets:
Interest-bearing
deposits with banks $ 9,401 $ 156 2.22 % $ 4,007 $ 97 3.24 %
Taxable securities 93,760 3,545 5.05 101,569 3,622 4.77
Tax-exempt securities 15,131 733 6.47 11,110 603 7.26
Total loans and fees (1)
(2) 639,355 29,656 6.20 623,004 34,812 7.47
FHLB and Federal Reserve
stock 8,102 329 5.42 7,871 254 4.31
Total earning assets 765,749 34,419 6.00 747,561 39,388 7.04
Less: Allowance for loan
losses (6,674 ) (5,678 )
Non-earning assets:
Cash and due from banks 22,772 17,380
Bank premises and
equipment, net 15,147 15,315
Other assets 42,136 40,387
Total assets $ 839,130 $ 814,965
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 213,597 $ 2,377 1.49 % $ 214,164 $ 4,301 2.69 % Time deposits 268,086 8,158 4.06 277,959 10,074 4.85 Other borrowings 72,060 1,116 2.07 61,023 2,135 4.68 FHLB advances 105,754 4,194 5.30 92,393 4,065 5.88 Subordinated debentures 17,000 711 5.59 17,000 962 7.57 Total interest-bearing liabilities 676,497 16,556 3.27 662,539 21,537 4.35 Non-interest bearing liabilities: Non-interest demand deposits 94,116 80,200 Accrued interest payable and other liabilities 4,025 7,221 Stockholders' equity 64,492 65,005 Total liabilities and stockholders' equity $ 839,130 $ 814,965 Net interest income (taxable equivalent basis) $ 17,863 $ 17,851 Less: taxable equivalent adjustment (249 ) (205 ) Net interest income $ 17,614 $ 17,646 Net interest spread 2.73 % 2.69 % Net interest margin 3.12 3.19 |
1) The amount of direct loan origination cost included in interest on loans was $271 for the nine months ended September 30, 2008. The amount of fee income included in interest on loans was $653 for the nine months ended September 30, 2007.
(2) Calculations include non-accruing loans in the average loan amounts outstanding.
Rate/Volume Analysis. The table below illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Three Months Ended Nine Months Ended
September 30, 2008 compared to September 30, 2008 compared to
Three Months Ended Nine Months Ended
September 30, 2007 September 30, 2007
Increase/(Decrease) Due to Increase/(Decrease) Due to
Total Net Total Net
Change Volume Rate Change Volume Rate
(In thousands) (In thousands)
Interest income:
Interest-bearing
deposits with banks $ 21 $ 33 $ (12 ) $ 59 $ 97 $ (38 )
Taxable securities 102 67 35 (77 ) (288 ) 211
Tax-exempt securities 64 75 (11 ) 86 132 (46 )
Total loans and fees (2,076 ) 175 (2,251 ) (5,156 ) 893 (6,049 )
FHLB and Federal
Reserve stock 22 - 22 75 8 67
Total increase
(decrease) in interest
income (1,867 ) 350 (2,217 ) (5,013 ) 842 (5,855 )
Interest expense:
Savings and other (829 ) (84 ) (745 ) (1,924 ) (11 ) (1,913 )
Time Deposits (529 ) 213 (742 ) (1,916 ) (347 ) (1,569 )
Other borrowings (384 ) 111 (495 ) (1,019 ) 333 (1,352 )
FHLB advances (96 ) 64 (160 ) 129 553 (424 )
Subordinated
debentures (116 ) - (116 ) (251 ) - (251 )
Total increase
(decrease) in interest
expense (1,954 ) 304 (2,258 ) (4,981 ) 528 (5,509 )
Increase (decrease) in
net interest income $ 87 $ 46 $ 41 $ (32 ) $ 314 $ (346 )
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PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Allowance and Provision for Loan Losses. Our financial performance depends on
the quality of the loans we originate and management's ability to assess the
degree of risk in existing loans when it determines the allowance for loan
losses. An increase in loan charge-offs or non-performing loans or an inadequate
allowance for loan losses could have an adverse effect on net income. The
allowance is determined based on the application of loss estimates to graded
loans by categories.
Summary of Loan Loss Experience:
Three Months Ended Nine Months Ended
September 30, September 30,
Activity for the period ended: 2008 2007 2008 2007
(In thousands)
Beginning balance $ 6,890 $ 5,707 $ 6,316 $ 5,654
Charge-offs:
Residential real estate (55 ) (21 ) (220 ) (86 )
Commercial real estate - - (146 ) (44 )
Construction (140 ) - (618 ) -
Commercial business (66 ) (125 ) (961 ) (125 )
Home equity (87 ) - (404 ) (94 )
Consumer (122 ) (17 ) (342 ) (93 )
Total (470 ) (163 ) (2,691 ) (442 )
Recoveries:
Residential real estate 1 5 1 13
Commercial real estate 1 57 3 61
Construction - - - -
Commercial business 2 33 6 38
Home equity - - 4 -
Consumer 21 6 76 27
Total 25 101 90 139
Net loan charge-offs (445 ) (62 ) (2,601 ) (303 )
Provision for loan losses 580 110 3,310 404
Ending balance $ 7,025 $ 5,755 $ 7,025 $ 5,755
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Provision for loan losses increased to $580,000 and $3.3 million for the three and nine months ended September 30, 2008 compared to $110,000 and $404,000 for the equivalent periods in 2007. Net charge-offs during the three and nine months ended September 30, 2008 were $445,000 and $2.6 million, respectively, an increase from $62,000 and $303,000 for same periods in 2007. The increase in the provision for loan losses for the third quarter was due to deterioration in the underlying credits on certain loans during the quarter, an increase in classified credits, and an increase in management's allocation for environmental factors. The aforementioned resulted in an increase in the allowance for loan losses as a percentage of loans to 1.09% as of September 30, 2008 from 1.07% as of June 30, 2008 and from 0.91% as of September 30, 2007. The increase in the provision for loan losses for the nine month period in 2008 was attributable to a significant increase during the period in the amount and severity in the Company's classified credits, which increased to $53.5 million as of September 30, 2008 from $29.4 million at December 31, 2007, and a further deterioration in the underlying collateral values of certain credits. The Company continues to see weakness in its construction and commercial real estate loan portfolios and has provided for the probable incurred losses in those portfolios accordingly. The increase in net charge-offs during the three and nine months ended September 30, 2008 was due to the Company's determination that a portion of the balance of certain collateral dependent loans was uncollectible. Generally, the charge-offs were necessary to write-down these loans to the anticipated collateral liquidation value, less costs to sell. The majority of loans charged-off had been identified by management previously and had amounts allocated for a substantial portion of the actual incurred losses. The Company continues to closely monitor its loan portfolio to identify any additional problem credits, deterioration in underlying collateral values, and credits requiring further downgrades in accordance with the Company's internal policies. As of September 30, 2008, management has reserved for probable incurred losses within the loan portfolio based on information currently available to the Company.
Federal regulations require insured institutions to classify their assets on a regular basis. The regulations provide for three categories of classified loans: substandard, doubtful and loss. The regulations also contain a special mention and a specific allowance category. Special mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the insured institution must either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge off such amount.
Non-performing assets. Loans (including impaired loans under the Financial Accounting Standard Board's Statement of Financial Accounting Standards 114 and 118) are placed on non-accrual status when they become past due ninety days or more as to principal or interest, unless they are adequately secured and in the . . .
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